Private Wealth

Weekly Research Briefing: More Than a Game

November 29, 2022

I could watch Richarlison's bicycle kick goal on an endless loop. That was incredible. What kid in the world wasn't trying to recreate that move the next time they were on a field? As for the rest of the World Cup, some nice upsets put some of the world’s leading teams on edge. Great individual stories. And the venues look pretty good for spending $200 billion on the event.

But 4,000 miles away, while watching the great games, the citizens of China are also seeing a world free of COVID. Seeing cheering, maskless fans while many cities in China are under lockdown and daily testing has got to be difficult. While the government has been trying to run towards fewer restrictions and more openness, this is difficult to do in a country with low vaccination rates and not enough hospital beds. But as last week's protests have shown, the citizens are not happy with the zero-COVID policies and would like to see changes. Will the government relent and give its citizens a win? The financial markets and those sourcing goods from China could also use a win from an easing of the lockdowns. But this is a complex issue so we will have to wait and see how it plays out.

With the games in Qatar happening mostly in the A.M. hours and the U.S. weather mostly good, shoppers had few excuses to not get out and do some holiday shopping. Early numbers show that consumers were spending and buying up the discounted items to the cheers of the retailers who are still working through their bloated inventories. Other Americans went to the skies as TSA data showed Sunday to be the busiest day since December 2019. As for broader, global economic data over the last two weeks, we are finding some series showing stabilization rather than the expected continued downward trend. Many commodity and inflation price series continue to recede as demand eases and supply chains unclog. Ongoing hawkishness at the Federal Reserve continues to invert the U.S. Treasury curves while investors wait for the next inflationary data point.

This is a big week for data. The monthly JOLTS and jobs data will drop as well as GDP revisions, ISM, personal income/spending, auto sales, and housing data. Expect more retail sales updates on the holiday season as well as ongoing consumer purchasing surveys. The markets will keep a close eye on all of the above in addition to any updates out of China regarding its COVID policies. It will also be make or break week for the first round of the World Cup. Who will move on and who will go home? Enjoy the games.

Daily new cases in China have jumped as they have in the rest of the world...

The country's low vaccination rates and growing ICU hospital bed numbers has caused the government to stand by its stiff lockdown policies.

Our World in Data

But strict zero-COVID policies are difficult to digest while the rest of the world is having fun in Qatar...

Images of maskless crowds at the World Cup in Qatar have sparked anger in China, where people worn out by harsh Covid-19 restrictions are questioning their government’s exceptional approach while the rest of the world lives alongside the virus.

China is the last major economy still attempting to stamp out the domestic spread of Covid-19, and has continued to shut down entire cities, seal off neighbourhoods and impose mandatory tests on millions...

Authorities have put more than a quarter of the Chinese population under some form of lockdown as of Tuesday, according to Nomura analysts — a contrast with the raucous World Cup crowds that have infuriated many Chinese social media users.

“Some people are watching World Cup matches in person with no masks, some have been locked at home for a month, locked on campus for two months without even being able to step out the door,” a Guangdong-based user on the Twitter-like Weibo platform wrote on Wednesday.

“Who has stolen my life? I won’t say.”

Another Weibo user from Shaanxi province said they were “disappointed” in their country.

“The World Cup has allowed most Chinese people to see the real situation abroad, and worry about the economy of the motherland, and their own youth,” the user wrote.

An open letter questioning the country’s Covid-19 policies and asking if China was “on the same planet” as Qatar spread on the popular WeChat messaging app on Tuesday, before censors removed it from the platform.

Hong Kong FP

COVID lockdowns are visible in the domestic air and subway travel figures below...

J.P. Morgan

Back in the U.S.A, holiday shoppers seemed to have resumed their pre-COVID ways...

Store traffic rose 7% this Black Friday compared with last, said Retail. Next, a firm that tracks shopper counts in thousands of stores with cameras and sensors. In-store sales rose 0.1%, and the average shopper spent less per visit than last year, according to the firm. Sensormatic Solutions, another firm that analyzes store traffic, said Black Friday traffic rose 2.9% compared with 2021.

Black Friday had been losing importance before the pandemic hit as shoppers spread out holiday shopping, grabbing earlier deals or buying more online. This year is “a bit of a return to normalcy,” said Brian Field, global head of retail consulting for Sensormatic.

Sales on Black Friday rose 12% from last year, according to Mastercard SpendingPulse, which measures in-store and online retail sales across all forms of payment. The report excludes auto sales and isn’t adjusted for inflation, meaning that it could reflect people paying higher prices for goods than they did in 2021.

Consumers were deal-driven, said Steve Sadove, senior adviser for Mastercard and former chief executive of department-store chain Saks Inc. “Apparel, electronics and restaurants were strong-performing sectors as consumers turned holiday shopping into a full-day experience,” he said.

This holiday many retailers entered the season, which they often rely on for a significant percentage of their annual sales, with too much inventory. To clear those goods, a slew of retailers are offering heavy discounts, a move that can eat into their profits.


Walmart beat earnings, raised guidance and solved much of its inventory bloat...

For Walmart, US comp sales momentum accelerated in Q3 with a two-year stack of 17.4% up 570 bps from Q2. Monthly sales gains were relatively consistent throughout the quarter. Food sales continued to lead with mid-teens growth.


In another sign of consumer strength, Broadway theater spending is back...

I also saw where three million people want to buy Taylor Swift tickets.

Torsten Slok

In the event this slipped by you over the break, the PPI came in much better than expected...

*(US) OCT PPI FINAL DEMAND M/M: 0.2% V 0.4%E; Y/Y: 8.0% V 8.3%E

  • PPI (ex-food/energy) M/M: 0.0% v 0.3%e; Y/Y: 6.7% v 7.2%e
  • PPI (ex-food/energy/trade) M/M: 0.2% v 0.3%e; Y/Y: 5.4% v 5.6%e

And the Philly Fed arrived much lower than we expected...

*(US) NOV PHILADELPHIA FED BUSINESS OUTLOOK: -19.4 V -6.0E (lowest since May 2020)

  • New Orders: -16.2 v -15.9 prior
  • Prices Received: 34.6 v 30.8 prior
  • Inventories: -6.5 v -1.7 prior
  • Employment: 7.1 v 28.5 prior

The Empire Fed was better, but the new order outlook looks very weak...

The Empire manufacturing index increased by more than expected, rising to 13.6 from 4.5 -- comfortably in expansion territory. The composition of the report was mixed, as the shipments and employment components increased but the new orders component declined. (Goldman Sachs)


Within the Kansas City Fed data, supplier delivery times went negative...

@LizAnnSonders: Future supply chain stress nonexistent per November @KansasCityFed Index ... outlook for supplier delivery times has crashed to lowest on record.

Monday's Dallas Fed continued the haphazard string of data: New orders weak, labor market softening, and prices declining...

Growth in Texas factory activity abated in November, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, fell five points to near zero, suggesting little change in output from October.

Other measures of manufacturing activity indicated contraction this month. The new orders index plummeted to -20.9―its sixth month in a row in negative territory and lowest reading since May 2020. The growth rate of orders index dropped seven points to -19.9. The capacity utilization index turned negative, falling from 9.1 to -3.4, and the shipments index posted a second consecutive negative reading at -7.5, down from -1.6 in October...

Labor market measures pointed to slower employment growth and stable hours worked. The employment index slipped 11 points to 5.9, its lowest reading since mid-2020. Twenty-two percent of firms noted net hiring, while 16 percent noted net layoffs—a notable increase from the 9 percent share noting layoffs the prior two months. The hours worked index remained near zero, suggesting no change..

Price growth eased, while wage growth remained elevated. The raw materials prices index moved down nine points to 22.6, falling below its series average of 28.1 for the first time in more than two years. The finished goods prices index fell eight points to 13.9, still slightly above its series average of 9.0. The wages and benefits index was unchanged at 36.5.

Dallas Fed

When United Rentals talks up its outlook, you have to pay attention given how many industrial end markets they touch...


Speaking of price pressure, this is great news for any chicken consumer...

Prices for chicken breasts in the U.S. have plunged about 70% since the first week of June, according to market-research firm Urner Barry. Wings and tenders have gotten cheaper, too, as poultry companies have increased production while demand from restaurants and supermarkets has remained flat, said chicken industry analysts and executives.

Chicken’s rapid price drop has brought relief to restaurant chains as crispy chicken sandwiches and wings have been key to restaurants’ efforts to generate buzz and draw diners...

Wingstop, where poultry sits at the menu’s core, told investors last month that its wing costs decreased 42.7% in the three months ended Sept. 24, compared with the same period last year. The company increased its earnings guidance for the current fiscal year and reduced its cost expectations.


Even better news for consumers and holiday shoppers as less than $3/gal gasoline may be the norm by New Year’s Eve..

@GasBuddyGuy: National average continues to drop, $3.517/gal, still tracking close to the fast case model, on our way to lower #gasprices. Most common price $3.39/gal, but is just days away from falling to $2.99/gal! Median is $3.43/gal.

Oil prices are now negative for 2022...

@bespokeinvest: Oil prices were up more than 70% YTD back in March. This morning's declines for crude takes prices into the red on a year-to-date basis.

One thing that the U.S. does not need in the next week...

“A national rail strike, which could happen as early as Dec. 5, could threaten the nation’s coal shipments, its supply of drinking water, and shut down passenger rail. The U.S. economy could lose $2 billion a day if railroad workers strike, according to the Association of American Railroads.”

Washington Post

Shippers are already having a difficult time with the price and availability of diesel fuel...

In the US, stockpiles of diesel and heating oil are at their lowest point ever for this time of year in data going back four decades. Northwest Europe is also facing a low buffer — inventories are forecast to hit a low this month and then tumble even more by March, shortly after sanctions come into play that will cut the region off from Russian seaborne supplies. Global export markets have gotten so tight that poorer countries like Pakistan are getting shut out, with suppliers failing to book enough cargoes to meet the nation’s domestic needs.

“It’s certainly the biggest diesel crisis that I have ever seen,” said Dario Scaffardi, the former chief executive officer of the Italian oil refiner Saras SpA who’s spent almost 40 years in the industry.

Diesel in the spot market of New York harbor, a key benchmark, is up roughly 50% this year. The price reached $4.90 a gallon in early November, about double year-ago levels.


The Fed speak continues to be hawkish as James Bullard reiterated on Monday...

(US) Fed’s Bullard (voter): FOMC needs to get to bottom end of 5-7% range

  • Risk that FED will have to go higher on rates in 2023
  • Markets under-pricing risk FOMC may be more aggressive
  • The prices of commodities have come way down from peaks reached earlier this year...Core goods prices...have yet to come down from elevated levels, as demand continues to outstrip supply. But there are signs that this is changing.
  • Better to get to right policy rate sooner, most important thing is we get to sufficiently restrictive level that it is well understood by financial markets
  • On pace of hikes, he defers to FED's Powell
  • First 250bps of tightening was just getting to neutral
  • All will go better if we get to restrictive level sooner to make 2023 a year of disinflation
  • FED may need to keep rates higher in 2023 and into 2024

Loretta Mester (president and CEO of the Federal Reserve Bank of Cleveland), leaned hawkish in this interview, but did note some of the good inflation and slowdown news...

LM: I don’t think we’re near a pause. Given we’re beginning to move into restrictive territory, we have the opportunity to slow the pace of increases and evaluate the effects and make sure we’re being very diligent in setting monetary policy to return the economy to price stability, but also judicious in balancing the risks to minimise the pain of the journey back to price stability.

We had one good October CPI report. I would need to see several more of those and more moderation and perhaps even a reduction in core services prices. And we also have to see better balance in the labour market.

Right now there are signs that labour market conditions are moderating on the demand side, but we still have pretty high wage pressures. We need to have more evidence confirming that things are moving in the right direction.

It’s very easy to be caught out by the good news, but we don’t want wishful thinking to take [the place of] really compelling evidence. The costs of stopping too early are high. We want to be very diligent about this.

Financial Times

The Fed's Raphael Bostic is much less hawkish and favors a further slowdown in Fed Fund rate increases...

Federal Reserve Bank of Atlanta President Raphael Bostic said he favors slowing the pace of interest rate increases, with no more than 1 percentage point more of hikes, to try to ensure the economy has a soft landing.

“If the economy proceeds as I expect, I believe that 75 to 100 basis points of additional tightening will be warranted,” Bostic said in prepared remarks for a speech in Fort Lauderdale, Florida, on Saturday. “It’s clear that more is needed, and I believe this level of the policy rate will be sufficient to rein in inflation over a reasonable time horizon.”

Bostic’s plan would shift away from 75 basis-point hikes and continue to raise rates to as much as 4.75%-5% over the next several meetings, which he described as a “moderately restrictive landing rate” where the Fed would hold go on hold for an extended period to continue to put downward pressure on prices.


A former vice chair of the Fed suggests that December could be a good time to slow the rate increases...

Finally, we seem to be getting some good inflation news. The market’s euphoria on Nov. 10, when the October consumer-price index came in below expectations, was undoubtedly excessive. But don’t let that obscure the good news, which was about more than one month.

The annualized CPI inflation rate over the past four months is now merely 2.8%. Over the four months before that, it was 12.2%. Four months is better than one, though still far too short to declare a trend. No one should think inflation has fallen durably by more than 9 percentage points. A more realistic indicator may be the 12-month inflation rate, which stands at 7.7% vs. 9.1% four months ago. It’s progress.

How should the Federal Reserve, which is far less mercurial than the markets, view this progress? As Yogi Berra once famously advised: When you come to a fork in the road, take it. The recently released minutes of the Federal Open Market Committee’s meeting earlier this month show that many members believe they may be at such a fork now—and that it may be time to slow down its breakneck pace of rate increases.

Remember, the Fed has been playing catch-up since March. The upper limit of its target range for the federal-funds rate now stands at 4%, up from 0.25% when it started. The last time the committee announced its multiyear intentions, after its September meeting, it expected to top out in the 4.5% to 4.75% range, although Chairman Jerome Powell has since suggested its internal views have shifted up.

Suppose you are thinking of topping out at 5% or 5.25%, and you are already at 4%. Continuing with 75-basis-point increments a meeting would seem a bit much, as the FOMC recognizes. It looks like time to slow down, to “taper” the pace of rate increases. The Fed isn’t yet on the verge of stopping. But the time seems ripe to contemplate a downshift, perhaps to 50 basis points or—dare I say it?—even to 25 at the Dec. 13-14 meeting. The committee gets to see one more CPI report before deciding. Let’s hope the report extends the “lower inflation” winning streak to five months.


If you think that things will get worse, here is a good chart showing how much Treasury Bonds love recessions...


Goldman Sachs shows the current jump in WACC as being the largest in 40 years...

One year ago, the weighted average cost of capital (WACC) for S&P 500 firms equaled 4.1%, close to the lowest level in history. However, during the past 12 months the cost of capital for US firms surged by the largest amount in 40 years. The WACC jumped by 200 bp to 6%, the highest level in a decade.

The cost of both debt and equity rose in 2022. Since the start of the year, the Fed has hiked the funds rate by nearly 400 bp (from 0-25 bp to 3.75-4.0%), ten-year US Treasury yields have climbed by 230 bp (from 1.5% to 3.8%), and investment-grade debt borrowing costs have jumped from 2.3% to 5.5%. We estimate the cost of equity has increased from 6.6% to 7.4%.

Goldman Sachs

Earnings estimates for 2023 continue to edge lower, not providing much support to the recent 10% gain in stock prices...

Earnings Scout

Note the similarities of today's market with past inflationary peaks...

@mark_ungewitter: Interesting study from the one and only @LeutholdGroup

If one waits for confirmation that the Fed is going to pivot, they might miss much of the move...


A negative stock performance during a mid-term year has been a good omen for the following year...

@RyanDetrick: Looking at all the times the S&P 500 finished red during a midterm year showed the next year was higher the past 8 times. Not to mention a very impressive 24.6% average gain that next year.

Look at the Dow Industrials trying to scratch back to green for 2022...


The Industrial sector is a big reason for some of the broader indexes recouping gains in the last month...


And even with all the hatred of the housing sector, the Home Construction index is five months from its low...


Also surprising is the strength in the European Financial sector...


If you aren't into macro investing, then just find a company that grows in any economic environment and increases its ROIC as its footprint expands...

@WTCM3: 2011 $TJX presentation

My biggest mistake was not moving 50% of my investable assets into the private markets when we merged with Hamilton Lane...

The private markets were going to be my portfolio ballast in the event my public stocks and bonds entered a window of fear and uncertainty. Little did I expect that my ballast would outperform the major public market equivalents by 3,500-4,500 basis points. Fate works in mysterious ways and I couldn't be more happy that Hamilton Lane and 361 Capital bumped into each other two Thanksgivings ago.

Meanwhile in Crypto Lending...

At the start of the year, there were three big North American retail crypto lenders. Now all three are bankrupt.


Andy Kessler (Author of the "Inside View" column for The Wall Street Journal opinion page) writes about the time the sharp end of a pin meets a balloon...

There aren’t many leveraged buyouts of technology companies, and for good reason. Technology and debt, like Red Bull and milk, don’t mix. Why? Because when technology works, it commands high valuations. You can’t LBO Google. But when technology moves on to the next new thing, there isn’t much residual value in the form of assets and collateral to call on in case of debt defaults. FTX, Elon Musk and SoftBank are learning this lesson...

The new poster child for the toxic cocktail of technology and debt is Sam Bankman-Fried, with his imploded FTX and Alameda empires. Sure, these companies misappropriated, to put it nicely, customers’ assets. And yes, withdrawals that acted like a bank run drove the company into Chapter 11. But the company’s original sin was to borrow against its own FTT token, which was held up by nothing but air.

This was crypto’s mass delusion. FTT was so thinly traded that FTX could set any price, but not forever. FTX and Alameda borrowed against tokens they themselves were manipulating, including Solana and others, which some called Sam Coins, now Scam Coins. The fatal conceit: They thought FTT would stay high forever, so they invested in often illiquid positions. FTX was even paying employees, vendors and whoever else would take it in FTT tokens, whose total market cap used to be almost $10 billion and is now about $400 million.

You can’t manipulate something forever. Reality eventually replaces delusion. All it took was someone to touch a pin to the bubble. After Coindesk leaked a copy of Alameda’s balance sheet loaded with FTT tokens, Binance CEO Changpeng Zhao started selling. FTT went from $22 to under $3 in 48 hours. So much for collateral. When the smoke clears, FTX/Alameda may have $8 billion to $15 billion in debt outstanding, with little to sell for repayment. It will take years to sort out who gets what.


I could read about successes in alternative energy all day long...

Across the globe, governments and developers are pouring hundreds of billions of dollars into large offshore wind farms like Beatrice to meet climate-change goals.

These initiatives are attractive to investors and lawmakers because they produce enormous amounts of clean energy and can be placed far enough from shore that they are largely out of sight. Britain is already generating more than 10 percent of its electricity from wind at sea, and on some gusty days, like Nov. 2, wind produces more than half. As energy security becomes a critical issue in wake of Russia’s war in Ukraine, the country aspires to nearly quadruple offshore capacity over the next decade...

Offshore wind farms like Beatrice are making up some of the difference. Investments in these facilities last year was £6.7 billion, roughly double those for oil and gas. Even as companies that make turbines are experiencing financial pain because of supply chain bottlenecks, the offshore wind industry is booming. Jobs in building and maintaining offshore wind farms, and at their suppliers, increased about 16 percent last year to 31,000, with about a third of them in Scotland, according to the Offshore Wind Industry Council...

Completed in 2019, Beatrice’s turbines can churn out enough electricity to power more than 400,000 homes, the equivalent of about one-sixth of Scotland’s total.

Beatrice also makes a load of money. In the year that ended on March 31, it recorded an operating profit of £218 million on total revenues of £393 million — or about £1 of operating profit for every £2 of revenue.

The presence of such an outsize business has been a boon to Wick, a town of about 7,000 people whose heyday was more than a century ago, when small fishing craft blanketed its port. Beatrice has paid to clean up the harbor area, including £20 million to renovate two stone buildings to use for the control center and building docks for the boats that go out to the farm. Beatrice’s owners have also provided £6 million for local improvements like new lights around the harbor and wheelchairs for a beach.

“It’s really been quite a boost in terms of regeneration in the whole town,” said Raymond Bremner, the leader of the local Highland Council.

Beatrice, which cost £2.5 billion to build, was Scotland’s first monster wind farm, and it helped open the way for even larger installations, some of them budgeted to cost four times as much, or more.


Awesome fact of the week: The Netherlands is the second largest exporter of agricultural products...

The rallying cry in the Netherlands started two decades ago, as concern mounted about its ability to feed its 17 million people: Produce twice as much food using half as many resources.

The country, which is a bit bigger than Maryland, not only accomplished this feat but also has become the world’s second largest exporter of agricultural products by value behind the United States. Perhaps even more significant in the face of a warming planet: It is among the largest exporters of agricultural and food technology. The Dutch have pioneered cell-cultured meat, vertical farming, seed technology and robotics in milking and harvesting — spearheading innovations that focus on decreased water usage as well as reduced carbon and methane emissions.

The Netherlands produces 4 million cows, 13 million pigs and 104 million chickens annually and is Europe’s biggest meat exporter. But it also provides vegetables to much of Western Europe. The country has nearly 24,000 acres — almost twice the size of Manhattan — of crops growing in greenhouses. These greenhouses, with less fertilizer and water, can grow in a single acre what would take 10 acres of traditional dirt farming to achieve. Dutch farms use only a half-gallon of water to grow about a pound of tomatoes, while the global average is more than 28 gallons.

More than half of the land in the Netherlands is used for agriculture.

Washington Post

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